Price of E-commerce Platforms and Kirana Stores Has Converged, Says SBI
The coronavirus (COVID) pandemic has introduced an outlet bias, as a large share of total spending moved online that is charging a mark-up over off-line prices. In fact, In fact, the price of e-commerce platforms and kirana stores has converged, says a research note from State Bank of India (SBI).
 
According to the report, during the pandemic, the use of online delivery platforms, such as Grofers, Nature's Basket and Licious has soared and most retailers on these platforms tend to have higher prices than in their physical stores.
 
During this crisis, consumers have spent a lot of time at home and online – and have become comfortable doing a set of activities online. So, people are also shopping essential items from e-commerce platforms. 
 
Interestingly, Dr Soumya Kanti Ghosh, group chief economic adviser of SBI, says, "before COVID-19, the prices of e-commerce outlets were much lower than the maximum retail price (MRP). However, due to the rise in demand and less supply, now there is no or less bulk discounts in e-commerce."
 
The analysis carried out by SBI reveals two distinct trends. “Firstly, the trends between April to November 2020. In principle, the share of discretionary spending of consumers that had reached as much as 35% of total cards spending in February crashed to 16% in April.” 
 
"Since April, the share of discretionary spends has, however, fluctuated wildly between 15% and 35% indicating consumers are still uncertain when to splurge on items of discretionary consumption, as uncertainty has prevailed in the minds of consumers with different phases of economy opening,” it added. 
 
However, SBI points out that this change in online price is not accounted in the data collection methodology used by the National Statistics Office (NSO), the change in spending outlets could cause another downward bias in the headline consumer price index (CPI) as computed by NSO. If NSO considers online prices, there would be 10 to 15 basis points (bps) impact on CPI inflation, it added.
 
CPI inflation slowed to 4.29% in April 2021 from 5.52% in March this year, primarily due to easing food prices. However, SBI feels, even as the pandemic rages through India, it is worthwhile to look beyond the headline inflation. It says, rural core has now jumped to 6.4% in April 2021 and would rise further in May this year. 
 
 
"Increasing health expenditure because of the pandemic is having a meaningful impact in rural areas. Item-wise inflation of health CPI shows persistent month-on-month increase in inflation of non-institutional medicine, and X-ray, electrocardiogram (ECG), and pathological tests. Even hospital and nursing home charges have increased in April 2021," SBI says.
 
 
In the current pandemic, the report says, headline inflation may not be incorrect to look at. It says, "A more important price concept is the relative prices, which are not a monetary phenomenon but their movements convey important information about the scarcity of particular goods and services as now like health." 
 
For example, SBI says, overall CPI declined in April 2021 because of significant decline in food CPI, but when the relative prices of food items are compared to overall CPI, the deceleration was not sharp as it was seen in actual food CPI. 
 
"Similarly, for certain items like fuel and health the increase in relative prices is maximum. Interestingly, the core CPI which was showing a decline of 57 bps increased in relative terms by 18 points. We believe such distortions in relative prices must be looked through now as it could have an important impact on ratcheting up future inflationary expectations," the report says. 
 
 
 
Against this backdrop, SBI provides three conclusions. 
 
First, it says, health expenditure currently at 5% of overall private final consumption expenditure (PFCE), could increase by at least 11% from the current level and this is likely to also result in squeeze in expenditure on other items of discretionary consumption, a recipe for a cutback in consumption spending. 
 
Second, the increase in fuel prices since December 2020, as the government is facing a collapse in revenue receipts, is having a direct impact on squeeze in consumption spending on discretionary items, other than on health, which is currently unavoidable. 
 
 
 
"But the most definitive conclusion when we re-estimated CPI headline by using SBI card spend data and through Paasche's Index, since December 2020, is that our CPI computed inflation for the five-month ended April 2021 is higher than Central Statistics Office (CSO) estimate on an average by 60 bps, while for April 2021, the computed inflation is at 5.35%," SBI says. 
 
"This has happened as spend on oil in December has crowded out the spending on other discretionary items, like health, grocery and utility services that was the trend in earlier months which is worrisome. In fact, the share of non-discretionary spend has jumped to 59% in April 2021 from 52% in previous month. This demands a cut in oil prices through tax rationalization, otherwise consumers' non-discretionary spending will continue to get distorted and crowd out discretionary expenses. 
 
"This will also impart a clear upward bias in inflation," the report says, adding, "There has been an increase in use of online delivery platforms, which is not considered by NSO and if NSO considers online prices, there would be 10 to 15 bps impact on CPI inflation." 
 
 
Third, SBI says, the rise in commodity prices has fuelled market expectation of possible rate hike by US Federal Reserve. US job openings surged in March to a record high, underscoring a rapid increase in labour demand as vaccinations accelerate and states reopen their economies, but it appears companies are unable to find the workers they need hence vacancies were not filled. 
 
"However, policy circles still maintain that current inflationary pressure in the US economy is transitory in nature and may not ultimately call for rake hike.
 
"We, however, will continue to watch this space for any future trends. All this will make it difficult for Reserve Bank of India (RBI) to manage the conflicting targets of inflation, exchange rate and adequate liquidity amidst weak growth," the report concludes.
 
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    India's WPI inflation rises to 10.49% in April
    India's annual rate of inflation based on wholesale prices sequentially rose to 10.49 per cent in April from a rise of 7.39 per cent in March.
     
    Significantly, this is the highest rate of WPI inlation in the last 6-months. The monthly rate of inflation, based on month over month movement of WPI index, in April 2021 stood at 1.86 per cent as compared to March 2021.
     
    On a year-on-year basis, the inflation rate last month was higher. The WPI had come in about (-) 1.57 per cent in April of 2020.
     
    "In April, 2021 (over April, 2020), the annual rate of inflation (YoY), based on monthly WPI, stood at 10.49 per cent (Provisional)," the Ministry of Commerce and Industry said in a statement on WPI.
     
    "The annual rate of inflation in April 2021 is high primarily because of rise in prices of crude petroleum, mineral oils viz petrol, diesel etc, and manufactured products as compared to the corresponding month of the previous year."
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
        
     
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    Moody's Cuts India's FY21-22 GDP Forecast to 9.3% from 13.7% on Rising COVID Infections, Lockdowns
    Ratings agency Moody's has revised India's gross domestic product (GDP) growth forecast for FY2021-22 to 9.3% from 13.7% and to 7.9% from 6.2% for FY21-22 due to negative impact of the second wave of coronavirus (COVID). 
     
    In a note, the ratings agency says, "Second wave of coronavirus infections would hamper economic recovery and increase risk of longer-term scarring for India. Unlike the first wave where lockdowns were applied nationwide for several months, the second wave 'micro-containment zone' measures are more localized, targeted and will likely be of shorter duration. Businesses and consumers have also grown more accustomed to operating under pandemic conditions. As of now, we expect the negative impact on economic output to be limited to the April to June quarter, followed by a strong rebound in the second half of the year."
     
     
    Moody's also revised India government bond rating to Baa3 with negative outlook. 
     
    It says, "The credit profile of India is increasingly constrained by obstacles to economic growth, a high debt burden and weak financial system. Policymaking institutions have struggled to tackle and contain these risks, exacerbated by the coronavirus pandemic. Mutually reinforcing risks from deeper stresses in the economy and financial system could lead to a more severe and prolonged erosion in fiscal strength, exerting further pressure on the credit profile."
     
     
    The negative outlook reflects mutually reinforcing downside risks from stresses in the economy and financial system that could lead to a more severe and prolonged erosion in fiscal strength than Moody's currently project.
     
    According to the ratings agency, persistent obstacles to growth—including weak infrastructure, rigidities in labour, land, and product markets, and rising financial sector risks—continue to constrain India’s potential. "These structural weaknesses may impair the economy’s recovery from domestic or external shocks to a greater extent than we presently assume," it says.
     
    Moreover, Moody's says, the nature of stress among banks and non-bank financial institutions (NBFIs) is still being revealed and may prove deeper and broader than it has assessed so far. 
     
    "The materialisation of economic and financial system risks would be mutually reinforcing; a deeper and more prolonged credit crunch would constrain GDP growth further, which would increase pressure on financial institutions’ balance sheets," it added.
     
    However, Moody's says, a rating upgrade is unlikely in the near future for India. Nevertheless, the ratings agency says, India’s economic strength provides key support to its sovereign credit profile. "The country's large and diverse economy, and prospects for population growth and productivity catch-up to boost growth potential over the long term all support economic strength." 
     
    "In particular, India's very large domestic market has provided strong demand-driven growth, fueled by rising incomes, which has helped to shelter the economy from the impact of external demand shocks. Still, incomes and consumption are vulnerable to negative shocks: India's per capita income increased to about $7,000 on a purchasing power parity basis in 2019, from around $3,500 in 2008, but remained much lower than the Baa-rated median of around $27,000. Such low incomes limit households' capacity to absorb shocks, whether domestic, external, or weather related. We expect rising incomes to continue to drive growth through relatively moderate economic cycles, but at a slower rate than in the past," Moody's says.
     
    The ratings agency considers India's legislative and executive institutions, civil society and judiciary to be relatively strong. However, in Moody's view, policy effectiveness has been lower than some international surveys, including the worldwide governance indicators, suggest. 
     
    "While ongoing government efforts to reduce corruption, formalise economic activity, and bolster tax collection and administration should further strengthen institutions over the medium term, there are increasing risks to their ultimate efficacy," it added.
     
    Coming back the pandemic, the second wave started in March in the state of Maharashtra, home to the major urban centre of Mumbai, and has since spread throughout the country. As of early May, India's active caseload count surpassed 3.5 million with daily new cases exceeding 400,000. The surge of the virus, which has been driven by a highly contagious variant, has put significant strain on India's healthcare system with hospitals overrun and medical supplies in short supply.
     
    Lock-downs and tightened restrictions have so far focused on the most severely impacted states and districts as 10 states or union territories continue to account for around 75% of active cases. The government’s latest order on containment measures, which remain effective until the end of May, advises states and Union Territories (UTs) to demarcate containment zones based on a test positivity or bed occupancy threshold; it recommends measures such as night curfews, prohibition of gatherings, closure of recreational facilities and reductions in public transport operational capacity.
     
    The re-imposition of lock-down measures will curb economic activity and could dampen market and consumer sentiment. However, Moody's says it does not expect the impact to be as severe as during the first wave. 
     
    On the fiscal front, the ratings agency says it expects the renewed surge in the virus to contribute to a marginal shortfall in revenue and a redirection of spending toward healthcare and virus response relative to what the government budgeted in February. 
     
    "As a result, we now expect a wider general government fiscal deficit of about 11.8% of GDP in fiscal 2021, compared with our previous forecast of 10.8% and an estimated 14% in fiscal 2020. We expect the combined impact of slower growth and a wider deficit to drive the general government debt burden to 90% of GDP in fiscal 2021, gradually rising to 92% in fiscal 2023," Moody's say.
     
    India began the third phase of its vaccination campaign for those aged 18-44 on 1 May 2021, making the vaccination available to the entire adult population. However, as of early May, only around 10% of the country's population had received at least one dose of the vaccine.
     
    Meanwhile, a shortage of vaccines and logistical difficulties in reaching a large rural population (about two-thirds of the population) complicate the vaccine rollout. The international community has recently contributed to India's vaccine efforts with increased medical and vaccine supplies to help address shortfalls. The spread of the virus and the rate of vaccinations will have a direct impact on economic outcomes, the ratings agency says.
     
    On 5 May 2021, the Reserve Bank of India (RBI) announced new liquidity measures to support the economy and financial system during the second wave. Measures focused on loan forbearance and liquidity access to households and businesses, including through a restructuring scheme with the extension of a loan moratorium for up to two years.
     
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